Higher Food, Commodity Prices Prompting Focus on Ag Policy, Research

Source: Ohio State University | Mar 16, 2011

Rising global demand, sporadic weather problems and other factors have been driving up commodity prices. American consumers might be feeling a pinch at the grocery store, but the impact in some parts of the world could be much more dramatic, according to Carl Zulauf, an agricultural economist at Ohio State University.

The situation spotlights a need for discussion on agricultural policy and research, says Zulauf, professor in the Department of Agricultural, Environmental, and Development Economics and researcher with the Ohio Agricultural Research and Development Center.

In addition, prices are higher for cattle, cotton, hogs, beef cattle, turkeys and eggs than last year, though prices for broilers are lower. For all farm products tracked by the agency, prices are up 24% above February 2010.

American consumers may notice food prices are creeping up. But they aren't seeing a 24% hike in their grocery bill, because farm prices often are a small share of the cost of food purchased at retail, Zulauf says. For example, in September 2010, farm costs accounted for just 22.5% of the entire retail food basket, he says. That percentage varies with the commodity – 43% for poultry down to 7% for cereal grains. An important factor is the amount of processing; generally, the more the processing, the less the retail cost can be traced to the farm.

But the hikes are nothing like what's being experienced in some parts of the world. In Algeria, the cost of flour and sugar doubled in recent months, which played a role in rioting there in January. Skyrocketing food prices in Egypt also played a role in that country's recent uprising, which led to an overthrow of the government.

The reasons for the price increases are fivefold, Zulauf says. In his view, growing global demand for food is the primary reason.

"Southeast Asia, China, India and other developing countries around the world – the speed at which some of these economies is developing is unprecedented," Zulauf says. As consumers have more money in their pockets, they spend more on food, increasing demand and driving up prices.

Other causes for rising prices include:

Rolling production shortfalls due to weather events. The severe drought in Russia, Kazakhstan and Ukraine – all major wheat producers – precipitated the current run-up in wheat prices. Excessive rains in Malaysia caused a dip in the production of palm oil, increasing the value of soybean oil, a major competitor to palm oil. Early season drought in Argentina has reduced its expected corn production.

A growing market for biofuels, particularly impacting corn prices. Currently, 28% of the U.S. corn crop is used for ethanol production. That figure includes the leftover distillers’ dried grains being used as feed after the starch is extracted for ethanol.

Relatively low stocks of grains. "When your stocks are low, even small changes in production will have an impact on prices," Zulauf says. Currently, the stocks-to-use ratio for all grains in the world is 19.4%, which is below the 10-year average of 21.4%.

Rising petroleum costs. "Agriculture is an energy-intensive industry, and the rising petroleum prices filter their way into farm production costs," Zulauf says.

As food prices become more of an issue, Zulauf believes they will lead to a serious discussion of food and agricultural policy.

"With ongoing economic development and increasing world population, we have to take seriously the notion of increasing our agricultural productivity," Zulauf says. "Agricultural research has experienced a declining share of government budgets – that clearly has implications on productivity. Even if we begin spending more on research now, we likely won't see the impact for a decade or more. These are long-term investments, but it's difficult to think in those terms with the U.S. federal budget deficit so high."

"The CRP has clearly been a success, reducing erosion and producing other environmental benefits," Zulauf says. "But that has been at the expense of food production. What is the appropriate mix of objectives for the CRP? It's a question we need to at least begin discussing."

Furthermore, policy-makers may reconsider the role of publicly held stockpiles, which were reduced significantly as a result of the 1996 Farm Bill. "It's a controversial topic, but I do think we should at least have a discussion about the tradeoffs that are involved, especially in light of recent global production shortfalls."

Whatever decisions are made, Zulauf hopes that the policy response will take into account the long view, he says. "Part of the current situation we find ourselves in will correct itself when weather returns to normal," he adds. "Bumper crops are not assured, but we should be careful not to over-correct for current conditions."

Further analysis by Zulauf and other Ohio State agricultural economists is available online.